Return on the market and risk-free rate of return

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A company currently has a debt to total assets ratio of 35% and the beta of the company is 1.05. The company has a current cost of debt of 7.8% and a tax rate of 38%. The current risk-free rate is 4.5% and the market risk premium (the difference between the return on the market and the risk-free rate of return) is 4%. Companies with similar risk characteristics and 40% debt can borrow at 9.5%. Would the company lower its WACC if it increased its debt to 40%?

Reference no: EM131994057

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